Directors beware, shareholder is watching

NEW DELHI: Shareholders in companies will soon have to monitor directors to see if any of their transactions are meant for personal gains, instead of leaving the responsibility of investor protection to the government.

The government will cease giving approvals to transactions that a company does with its subsidiary or parent company or with those entities that may be related to members of senior management.

The idea is to reduce the state���s interference in business and protect the investor���s interest by ensuring greater transparency in the affairs of the company. Accordingly, the rules to be framed under the proposed new company law, which will be introduced in Parliament in the Budget session, will specify the information that directors have to disclose before the company.

Shareholders ��� not the government ��� will then decide whether giving a particular contract to a relative of a director in the company would lead to his personal gain at the expense of the company.

Rules under the proposed new company law will fix a threshold for such transactions for which shareholder approval will be necessary.

Failure to disclose relationships that a director or his relatives may have with the company in case of raw material supply or lease of property would be a reason to disqualify the official from his directorship. Those directors will be deemed to have vacated office and will be penalised.

The new law will also remove other archaic restrictions like capping the remuneration of directors, which is now linked to the company���s profits. Very often, due to shortage of staff, the government considers the application for a raise in the salary of a director after he has left the company. Then the only option available to the government is to endorse the raise that the company has given to the executive.

A reference to a parliamentary panel is the only possible reason for the new company law getting delayed. The provisions have already undergone several rounds of revision after consultations with various ministries.